Nigeria’s three tiers of government split more money among themselves in April as the Federation Accounts Allocation Committee (FAAC) shared a total of N780.9 billion, 34 percent (N199 billion) more than the N581.56 billion shared the previous month.
The money shared in April was from revenue made in March, the month where crude oil prices fell 37 percent to an average of $26 per barrel from $42.3 per barrel in February. Oil production did not increase in this period to make up for the shortfall in price.
Despite the apparent decline in oil export receipts, which account for more than 50 percent of government revenue in Nigeria and influences the amount shared by the FAAC, allocations from March were still higher than the month where oil prices were higher.
There are two reasons for the jump in FAAC allocations. The first is the devaluation of the official exchange rate by 17 percent to N360/$ from N306/$.
Unlike in previous occasions when the amount shared was calculated based on the official exchange rate of N306 to $1, the allocation in March was arrived at based on the adjusted exchange rate of N360 to a dollar.
A weaker naira was always going to boost government revenues by allowing dollar earnings from oil to be converted at a higher rate and that’s what is starting to happen now.
The Central Bank of Nigeria (CBN) finally heeded calls of a motley crew of economists including the International Monetary Fund (IMF) when in March, it devalued its currency as oil prices tumbled and the country’s balance of payment deficit worsened.
The devaluation may be unable to mask the decline in subsequent FAAC allocations on the back of even lower oil receipts.
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The second reason why March FAAC allocations were higher can be attributed to the increase in Value Added Tax (VAT) collections that showed the impact of the 50 percent increase in VAT rate to 7.5 percent.
VAT collection was up 20 percent to N120 billion from N100 billion collected in January 2020 and up 30 percent from N92 billion collected in February 2019.
VAT collection is however likely to take a hit from the lockdown in April which would then affect the amount shared next month.
Not sustainable
“May is when we expect to see the effect of the fall in oil prices and COVID-19 lockdown fiscal effects on FAAC allocations,” one economist said, suggesting the jump in April is unsustainable.
Brent crude has fallen even lower since March, touching a 21 year-low of $15.98 per barrel Wednesday, with Nigeria stuck with millions of unsold barrels of crude.
The drop, sparked by a perfect storm of coronavirus fuelled demand destruction and global crude storage facilities reaching their limits, is unlike anything markets have ever seen. And it’s left even the most veteran industry players scratching their heads.
Then there’s the Coronavirus lockdown which will affect the extent of VAT collections with most stores closed and discretionary spending low.
The three states that have been under lockdown for some three weeks now, Lagos, Abuja and Ogun, account for around 75 percent of nationwide VAT collection.
